The Excel stands up to any test. The phrase, pronounced in the economic universe, does nothing more than refer to a reality that combines voluntarism with kicking solutions forward. “We have reached an understanding on the framework for the implementation of monetary policy as part of a multi-pronged approach to deal with high and persistent inflation,” the official statement from the International Monetary Fund (IMF) said.. Therefore, a major challenge is presented: that the goals established in that first outline can become operational goals for the design of economic policy from now on.
The watershed was in the political field between those who saw an agreement as necessary and those who believed it to be a burden for the reactivation of the Argentine economy, submerged after three consecutive years of recession (the last drop was more than 10% in the 2020 pandemic) and a start of recovery last year. But nobody sees it as a sufficient step to start, finally, a virtuous cycle of development.
futuristic crack
“The flight plan is missing and how it will be instrumented. But decompressing so as not to default is already positive”, he underlines Eduardo Fracchiadirector of the Economics area of the IAE. In his opinion, the decision implies betting on “a nod to the markets, some fiscal adjustment, inflation containment, slight growth, liquidating the debt a little, updating rates, among others.”, a mix of economic realism that slows down deterioration and that can even give a glimmer of hope to Alberto Fernandez in the 2023 electoral challenge.
Camilo Tiscorniapartner of C&T Economic Advisors He also sees something positive in avoiding the “cliff” of the economy when the “understanding” is confirmed. In his opinion, despite the fact that some time ago an agreement was discounted for November or December at the latest, “the strategy of continuing to pull the rope ended with the scare caused by the low level of reserves that greatly complicated the situation. But the novelty of Maximo Kirchner resigning, does not help to lower the risk”, he completes.
Others, on the other hand, see this as a way of postponing an inevitable change of direction in economic policy. George HillPresident of IDESA is emphatic: “it is going to fail because it is the same strategy as the agreement with the IMF in 2018: they want to avoid the adjustment, assuming that the economy is going to grow, that public revenues will grow more than spending and thus cuts are avoided. It’s a utopia.”
In this vision, the weakness of the chosen strategy lies in the fact that the economy cannot grow with such a disordered state. “It is inconsistent. Logic indicates that first we have to lower the fiscal deficit so that the economy can begin to grow” Colina sentences.
The issue of the much talked about adjustment is not another factor. Fernando Marengoassociate economist at Arriazu Macroanalysts, argues that from what is known so far, there is a pre-agreement that seeks to solve short-term problems: inflation, monetary issue “and for this it attacks the deficit, while trying to stop losing reserves. Now it does not face the underlying problems of the country, which will require structural reforms (economically: tax pressure, level and efficiency of spending, pension and labor reform)”, he projects.
In detail of the agreement with the IMF
The dilemma is not in each of the committed goals in themselves, but on how to articulate them to achieve them simultaneously in a dynamic balance that, in addition, will depend on exogenous variables. (commodity prices, energy prices, climate, international conflicts, inflation and global interest rates, for example) that will be able to disarm in hours the effort of months.
Marengo calculates that the “normalized” primary deficit in 2021 (not counting the “one-time” extraordinary income) was 4.3% of GDP, so the adjustment committed for this year would be an additional 1.8%. In other words, with these estimates, fiscal discipline or the ability to generate income should be much more successful to achieve what was promised. Except, of course, that the spirit of understanding is to move the high point to later. Spinning a little finer and with the calendar in hand, for the next administration, which in Argentina is the long term.
In an economy with reserves at their lowest level, with exchange controls and import traps and an exchange rate gap that fluctuates 100%, the trajectory of the dollar is a key element, although impossible to evaluate without the rest of the variables. Tiscornia is not betting that the official exchange rate, in an effort to make up for the great delay of last year (+24% against +51% inflation) will recover lost ground. He believes that it will be difficult for him, precisely because of the inflationary pressure that also has to reestablish highly distorted relative prices with almost two years of controls and anchors to curb inflation (tariffs and the dollar). But the most difficult game, in his view, will be to rebuild reserves, another promise that is much easier to formulate than to achieve.
In this field, the estimates are not encouraging for this year. Surely, the harvest will end up being lower than last year’s even with prices that were sustained, with a combined drop projected at US$ 2,000 million. In addition, energy prices (mainly oil and gas) continue to rise, encouraged by the conflict between Ukraine and Russia and would require more outlays to meet liquefied gas imports.
Money. Also, monetary policy is another of the issues on which the Fund’s monitoring will focus. “The agreed fiscal path would gradually and sustainably improve public finances and reduce monetary financing,” underlined the IMF press release, in case any “heterodox” insists on finding multiple causes for “persistent” inflation according to their own name. It is not a minor issue: 10,600% since the abandonment of convertibility, that is, an average rate of 26.33% (almost 2% per month). For the technicians who drew up this contingency plan, looking carefully at the pipeline that links the fiscal deficit with its financing via monetary issuance will be a daily task. Therefore, they project, alternative sources should be sought, precisely because a substantial drop in spending is not expected and that is clear. The interest rate, it is stipulated, should return to positive (that is, more than 5% per month based on current inflation). Will that be the effectively “positive” rate? It is clear that, if that happens, it will decompress the demand for issuance, but at the same time it will increase the cost of financing the Central Bank, which has a debt stock of almost 4% of GDP in a snowball that is very difficult to stop. Confidence once again has an operational role: it will determine the availability of voluntary funding available to the Government to be able to build a temporary bridge until the long-awaited zero (operational) deficit is achieved in 2025.
But all these pieces, like those of a Jenga, will move trying not to alter the partial balance achieved in the other sectors, with a control panel that seems to be defined with some key indicators: the exchange rate gap, the level of activity, the level of reserves and, when not, the monthly inflation rate. Almost everything else will be accommodated by addition, but a setback in these achievements will force again and again the request for a “waiver” and the visit of the technical missions will become a nightmare. Perhaps, as we naturalize “persistent” inflation, we will also assimilate the eternal monitoring of the Fund.